Minimize The Impact Of The Debt Deal On Your Finances

Congress proved something on August 1, 2011 –- the American people are resilient, but we’ll only take so much inaction. Most of us, whether Republican, Democrat or indifferent, were fed up with our government leaders by the time the first of August even rolled around. After weeks of infighting between the parties, Congress finally passed a lopsided debt reduction bill that also raised the debt ceiling. Here, we’ll take about how this debt deal affects you.

The final plan, voted on in the Senate and signed by the President on August 2nd, adds more than $2 trillion in spending cuts over the next decade. It also raises the debt ceiling (the amount of debt the government allows themselves to contribute) until at least 2012.

Nevertheless, just like all negotiations, no one got most of what they wanted. In fact, there may even be more disagreement, as the deal requires that a new joint committee of six Republicans and six Democrats meet to decide on another $1.5 trillion in cuts by Thanksgiving.

So here’s where it gets personal. It’s likely that part of the cuts will include tax and entitlement reform. For Americans that make more than median-range income, that could mean more taxes and less benefits, since Social Security and Medicare are also on the table. While it’s expected that they won’t be cut completely, some sort of new formula for dealing with aging baby boomers is necessary. This directly affects a large number of personal investors who are nearing or have just settled into retirement.

What’s more, many liberal investors (such as myself) are wondering what they’ll get out of the debt deal. While most cuts will be delayed for a year to help soften the blow to the economy, the markets are already not responding well. The stock market took a huge tumble in the aftermath, with the Dow Jones dropping over 500 points. The outlook for the creation of new jobs doesn’t look too good either, with the number of people claiming unemployment benefits remaining flat in the days after the debt deal.

There isn’t much good news for the education sector either. Many folks in the finance and investment sector went back to school after the big crash, hoping to gain an advantage over the other thousands of people looking for jobs. While the deal does increase Pell Grant amounts, it does so at the expense of federal subsidized loans. Traditionally, these loans do not accrue interest while a student is in school. Now they will –- which could mean upwards of $10,000 extra in student loan debt for new graduates from Master’s and PhD programs.

Bottom line: Americans are getting a harsh reality check as the new debt deal goes into effect. Here are four tips to help you minimize its impact on your own life and on your finances:

2. If you or your children are in school, look for alternative funding sources. There are dozens of scholarship websites on the web that link students with public and private fund sources and grant opportunities. Avoid taking out loans if at all possible, as you may be paying them down for a long time if you do.

3. Let your government representatives know how the debt deal affects you as an investor. The bill might have already become law, but your voice can still be heard! There’s hope to minimize the tax impact and loosen the strain on the markets if our leaders hear first-hand from personal investors like us.

4. Don’t let the partisan politics in Washington distract you from your ultimate goal: growing your own portfolio. With strong and diversified assets, you may not even need Social Security or Medicare when you retire. Free yourself from the worry and stress that come along with relying on government funding. Do yourself a favor and keep an eye on those long-term investments, like IRAs and 401(k)s.

This is hardly the last news you’ll hear about the debt deal. The markets may not bounce back for quite some time, but I thoroughly believe that they eventually will, and persistence in managing your portfolio will be key. Politicians, on the other hand, will start turning their attention to jobs and unemployment numbers. And while the threat of Standard & Poor’s downgrading the U.S. credit rating is very real, investors should use this time as an opportunity to tie up loose financial ends and to come up with portfolios that are stronger, sturdier and more diversified.

I hate the deal because it just kicks the can down the road again. The spending cuts are not real cuts at all, just reductions in planned growth. Spending goes up every year so it is hard to understand all the screaming about austerity. We are running a 1.5+ trillion dollar deficit – 10% of GDP — does that sound like austerity to you?

The government does not spend money efficiently because it has extremely low accountability. It can force you to give it money. That is how it can get away with waste year after year — it does not have to compete like a (non-crony) business does. So the more money the government controls, the more wasteful and inefficient the economy becomes. This translates into lower standard of living for you and me.

What I want to see is actual CUTS, enough so that the government does not spend more money than it takes in. That is a 40% cut in spending — can’t be done all at once, but it has to be done. Tax reform would be fine as well. The tax code is absurd and enormously inefficient. I would favor deleting the IRS and the tax code entirely and replacing it with a national sales tax or a per capita tax. I would also favor cutting defense spending hugely and ending our useless and counterproductive meddling overseas. Social Security and Medicare should be privatized with subsidies for the truly poor. And of course, the subsidies to banks and Wall Street are egregious.

SquirrelersAugust 12, 2011 at 3:34 pm

I think that Digerati Spouse said it well by saying that this deal “just kicks the can down the road again”. The problem isn’t going away anytime soon, and bigger, broader fundamental changes need to be made. Good comments above.

Also, I like the advice in the post to keep focusing on avoiding being distracted on your ultimate goal, which is growing your portfolio. I’ve already read and heard people talk about getting out of the market entirely, which is panic mode.

Brian YangAugust 13, 2011 at 10:54 am

@Digerati Spouse

Totally agree. It’s an incredible shame that the government will now have even more money to potentially waste, as if they don’t do it enough already. It’s also diminishing returns. How can any organization, with no competition and accountability, run efficiently? It’s impossible.

Cutting spending is huge, and the military should be the first place it starts. Why are we really wasting our time and money in the middle east? Tell me why??? Trillions of dollars being sunk into a big black hole over there.

Also, on the flip side, cutting spending on education is not the answer either. I may be biased since I’m a college student… but every damn semester they raise the tuition costs, making it more expensive and useful to go to college each year… even more so in an economy like this!

J. BradleyAugust 15, 2011 at 5:36 am

@Brian – I agree with your statement on cuts to education. Its a double-edged sword: government cuts to higher education force schools to raise tuition and impact student loan debt for college students. Keeping an educated society should be government’s priority, unfortunately in a tough economic climate, its often one of the first things to get cut.

Fiu Investment ClubAugust 21, 2011 at 9:05 am

The market is way too crazy to predict right now, politicians are only making it worse…. The amount of credit that we have used to fund our growth is unsustainable, we need to handle this problem now, and not at the last minute like Washington has been handling it.